Monthly ETF Outlook: 5 Data-Driven Picks for the Month Ahead

This month, TrendWell Digest highlights five ETFs with strong model alignment: XLK, IJR, XLF, XLU, and XLY. Across these five, when the listed signals were aligned (or stronger) in our full monthly history since October 2000, the group’s average historical annualized return was 20%.

The prior month’s market tone was shaped by shifting rate expectations, cooler inflation trend data, and cross-sector rotation. Those conditions tie directly to the signals below—rate sensitivity, volatility versus history, and mean-reversion across key sectors.

XLK (U.S. technology)

• Materials stretch (XLB, 14-month RSI elevated): An overbought XLB has historically preceded rotation back into growth. When XLB’s RSI was this extended, XLK returned 25% annually; when not, 3%.
• Healthcare momentum (XLV, six-month gain ~6%): Firm XLV often coincides with improving breadth; when XLV was this strong, XLK posted 18% vs 2% otherwise.
• 1-year Treasury yield, three-month decline: Falling front-end yields lower discount rates and historically support longer-duration sectors; with this move, XLK returned 13% versus −5% when weaker.

IJR (U.S. small caps)

• Dow (DIA) volatility, three-month pickup: Rising DIA volatility has often set the stage for small-cap catch-up. Under this setup, IJR returned 24% vs 9% when calmer.
• Materials stretch (XLB, elevated RSI): When XLB was this extended, small-cap participation tended to improve; IJR returned 20% vs 4% otherwise.
• Mid-caps flat last month (IJK ~0% prior-month): Flat IJK frequently precedes mean-reversion into smaller names; with that setup, IJR returned 15% vs 7% when not.

XLF (U.S. financials)

• Macro growth/liquidity proxy, six-month downswing: A sharp downswing in broad macro growth/liquidity (from our composite series) has historically aligned with curve resets that help financials’ relative pricing; with that move, XLF returned 61% vs 7% otherwise.
• Small-cap volatility, 12-month level slightly above average (IJR): A livelier risk backdrop has lined up with stronger financials; XLF returned 19% vs 3% when subdued.
• Materials volatility, 12-month level below average (XLB): Calmer cyclicals can compress risk premia across financials; XLF returned 16% vs −2% when higher.

XLU (U.S. utilities)

• Financials volatility, three-month level below average (XLF): Lower XLF volatility tends to coincide with steadier rate expectations—historically constructive for rate-sensitive utilities. With this backdrop, XLU returned 17% vs 2%.
• 1-year Treasury yield, 12-month decline: A drop in the 1-year yield eases discount-rate pressure; XLU returned 16% vs 3% when higher.
• Consumer Discretionary volatility, three-month level below average (XLY): Quieter XLY often supports defensives’ relative stability; XLU returned 12% vs 1% otherwise.

XLY (U.S. consumer discretionary)

• 1-year Treasury positioned low within its 52-week range: Easier near-term funding costs and sentiment historically aided discretionary; XLY returned 23% vs 4% when the 1-year yield sat higher in its range.
• Fed funds rate, prior-month decrease: Easing or steady policy has aligned with stronger discretionary cycles; XLY returned 18% vs 8% when not.
• Energy (XLE), 12-month change ~0%: Softer energy costs typically relieve household pressure; XLY returned 18% vs 6% otherwise.

Why this basket now

Across these signals we see: easing front-end rates, contained sector volatility versus history, and rotation dynamics (stretch in XLB, firm XLV, improving small-cap risk appetite). Historically, that mix has supported growth leadership (XLK), small-cap participation (IJR), constructive financials (XLF), and rate-sensitive defensives (XLU), while discretionary (XLY) benefits from steadier policy and benign energy trends.

We’ll keep publishing a transparent running performance log each month—and we hope your portfolio continues to TrendWell.

This article is for informational purposes only and does not constitute financial advice.

Sources (context only): Federal Reserve (policy & rates), U.S. Treasury (yield curve), Bureau of Labor Statistics (inflation).